Fitch sees another 100 bps policy rate hike by Dec, cites rising inflation

Growth will improve in June quarter as consumption revives and Covid-19 cases continue falling, it says

The Reserve Bank of India (RBI) could increase policy rate by another 100 basis points to 5.9 per cent by December 2022, said Fitch Ratings on Tuesday.

“With the inflation rate on the rise, the Reserve Bank of India (RBI) turned hawkish in April by introducing the new Standing Deposit Facility (SDR), which replaced the reverse repo rate to set a new, higher floor for the interest rate corridor. In May, in an unscheduled policy announcement, the RBI raised rates by 40bp to 4.4%, and subsequently to 4.9% in June. Given the deteriorating outlook for inflation, we now expect the RBI to lift rates further to 5.9% by December 2022 and to 6.15% by the end of 2023 (vs. previous forecast of 5%) and to be unchanged in 2024,” it said in its latest Global Economic Outlook.

Fitch last week upgraded India’s sovereign rating outlook to stable from negative, keeping sovereign rating unchanged at the lowest investment grade.

Economic growth will improve in the June quarter of FY23 from 4.1 per cent in the March quarter of FY22 on a rebound in consumption, citing Covid-19 cases falling in end-March. “We see consumer spending sustaining the economy in 2022 given the potential for catch-up, as an easing in restrictions allows for greater spending on sectors such as retail, hotels and transport,” it said.

Fitch earlier slashed its India growth forecast to 7.8 per cent in FY23 from 8.5 per cent estimated.